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NZ's Heartland Group strikes deal to acquire authorised deposit-taking institution Challenger Bank in Australia

Banking / news
NZ's Heartland Group strikes deal to acquire authorised deposit-taking institution Challenger Bank in Australia
Image: Heartland Group.

Heartland Group Holdings, parent of Heartland Bank, has struck a deal to buy Australia's Challenger Bank for about A$36 million as the New Zealand financial services provider continues its Aussie expansion drive.

The deal, which Heartland describes as a conditional share purchase agreement, is with share market listed Aussie investment management firm Challenger Ltd.

The Melbourne-based Challenger Bank is an authorised deposit-taking institution (ADI) overseen by the Australian Prudential Regulation Authority (APRA), offering savings and lending products. Heartland says its products include retail term deposits and home loans, with its system also capable of reverse mortgage origination.

As of June 30, Challenger Bank had A$89 million of retail lending exposure, A$17 million of corporate lending exposure and held A$228 million worth of deposits.

Assuming the deal is completed, Heartland says its existing Aussie reverse mortgage and livestock businesses in Australia will be transferred to "sit in or under" Challenger Bank.

"The opportunity to grow these existing businesses in Australia either as part of a bank or a broader banking group is significant. Challenger Bank also affords further opportunities to expand Heartland’s best or only products into Australia," Heartland says.

"For regulatory reasons, Heartland will be required to hold Challenger Bank through an Australian incorporated non-operating holding company which is approved and regulated by APRA. It is anticipated that Heartland’s top-level holding company in Australia, Heartland Australia Holdings Pty Limited, would be the appropriate vehicle to apply to APRA for authority to act as a Australian incorporated non-operating holding company," says Heartland.

Additionally Heartland says it "continues to engage with the Reserve Bank of New Zealand" to obtain consent for Heartland Australia Holdings to also act as the non-operating holding company "of Heartland Bank Ltd in New Zealand."

Paying above net asset value

Challenger Ltd says the proposed purchase price is about NZ$11 million in excess of Challenger Bank’s net assets of about A$25 million. Additionally, capital of about A$100 million is expected to be returned to Challenger Ltd prior to deal's completion, subject to APRA approval.

The deal requires regulatory approval in both Australia and New Zealand, plus consent under Australia's Financial Sector (Shareholdings) Act.

Heartland says the about A$36 million acquisition price is subject to adjustments for net assets delivered at completion. It plans to cover the A$36 million "through existing resources."

Heartland says its strategic objective for expansion in Australia requires the establishment or acquisition of an ADI. That's because becoming a bank through an ADI offers a number of benefits including providing access to a deep and efficient pool of funding to support ongoing growth, potential for higher margins, to the extent that retail funding rates are less than wholesale rates, and providing a platform to extend Heartland’s "best or only strategy" into Australia, Heartland says.

"The aim is to create a digital bank which, once Heartland assets are transferred to it, will be profitable. This, together with Heartland’s best or only strategy, provides the opportunity for a differentiated proposition."

Heartland curtails interest in another Aussie bank

Meanwhile Heartland says it's pulling the plug on its potential acquisition of Avenue Hold and Avenue Bank Ltd, which is a restricted ADI. Announcement of a "non-binding memorandum of understanding" with Avenue Hold Ltd was made as recently as August 23.

"Since then, market conditions have changed. Heartland also became aware of Challenger Bank as an alternative opportunity. Heartland Board’s assessment is that Challenger Bank is a stronger acquisition opportunity for Heartland’s execution of its strategic objective for growth in Australia as it offers a full ADI licence," Heartland says.

"Challenger Bank has also recently undertaken a programme of significant investment to build out its digital capability, which fits with Heartland’s digitalisation strategy."

"Heartland has accordingly advised Avenue Hold that it will no longer be exploring the potential acquisition opportunity previously disclosed, and has discontinued due diligence and negotiations. Heartland made an initial subscription for A$5 million of capital, about 11%, in Avenue Hold. No decision has been made on the future of this shareholding," says Heartland.

Lending growth

Additionally Heartland provided a short trading update. It says the June quarter, the first one of its financial year, featured growth across its key lending portfolios being reverse mortgages, motor vehicles and asset finance.

"Reverse mortgages in both New Zealand and Australia maintained strong growth momentum, recording 24.4% and 19.3% annualised growth in 1Q2023 respectively. The motor portfolio is starting to return to growth levels seen before the New Zealand Credit Contracts and Consumer Finance Act 2003 and the Credit Contracts and Consumer Finance Regulations 2004 were amended with effect from 1 December 2021, recording 7.8% annualised growth in 1Q2023," Heartland says.

"Asset finance recorded annualised growth of 10.3% in 1Q2023. Other areas are performing satisfactorily, noting that the livestock lending season has only just commenced."

At the time of writing Heartland's shares were up 2.35% at $1.74.

Heartland's full announcement is here, and Challenger's is here.

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Can someone explain this bit please?

> net assets of about A$25 million. Additionally, capital of about A$100 million is expected to be returned to Challenger Ltd prior to deal's completion,

25 - 100 = -75

So heartland is paying $36  mill for a company that will be 75 million in negative equity?


Challenger Ltd allocated $100m of capital to its subsidiary bank (they only just bought it a year or so ago) presumably with the view that they were going to grow the book.  Guessing the commitment would not have resided on the bank subsidiary's balance sheet other than uncalled capital.  But have now changed plans and that $100m of capital is released back to their life insurance/annuity book, which possibly needs the capital given market turmoil. 


and is that 100m of capitlal not part of 'net assets'?


Reverse mortgages need to be banned, as they have been in other developed countries. In France, decades ago, they were banned because old people were being bumped off for their assets. Not suggesting Heartland is doing that of course, but allowing this kind of market to develop creates extreme moral hazard.


heartland reverse mortgage interest rate is now 8% so their chance of owning your house outright is accelerating.